Tesco needs to cut its final dividend, boosting its war chest to £1.3bn for
the current financial year

Half-measures never work in a real crisis. Britain’s supermarkets are at a historic turning-point: a blizzard of economic, technological, competitive and social forces means that they need to reinvent themselves if they are to survive. The pace of change has intensified in recent quarters, reaching a rate that has stunned even many of the most experienced retail veterans. While some of the changes are cyclical in nature, the vast majority will turn out to be permanent.

That is why Tesco should be applauded for taking real action. It has slashed its interim dividend by 75pc, further reduced its capital expenditure and announced that Dave Lewis, its new CEO, would be starting on Monday, a month earlier than planned.

If anything, the firm needs to go even further: the moves announced on Friday freed up £700m in cash, which is a great start. But Tesco also needs to cut its final dividend by the same amount, which would increase its war chest to £1.3bn for the current financial year. Lewis will also have to take an urgent and ruthless look at the firm’s remaining international operations and withdraw as quickly as possible from any market that is not delivering the right risk-adjusted return on capital.

The stark reality is that a massive price war is about to break out in British retail. Even without that, it is clear that supermarkets need to retain as much cash as possible. Sir Richard Broadbent, the company’s chairman, has helped to introduce much greater capital discipline into the business; for too long, many British retailers have been acting as if capital were free and failing to sufficiently take opportunity cost into account. Others who are still spending with relative abandon need to take a very careful look at their own business plans.

Tesco had another problem, which it is now clear helped to hasten ex-CEO Philip Clarke’s departure from the company: the current store refurbishment programme is not delivering the results that had been hoped for. The strategy, which among other elements included adding Giraffe restaurants and special coffee shops to superstores to make them more of a destination, doesn’t appear to be working. It is too soon at this stage to identify exactly what element of the revamp isn’t delivering; in the short term, however, it makes a lot of sense to curtail this programme and to stop wasting money.

In the longer term, Dave Lewis, one of Britain’s foremost brand and marketing experts, who has spent years at Unilever, will need to decide what he wants Tesco to represent. He will need to define a new identity for the company no later than in early 2015. The retailer will have to be seen, once again, to be on people’s side; it will need to build and craft a relationship with its tens of millions of customers that is not merely functional. These days, Tesco’s once distinct identity has become blurred; it is not quite clear what the store stands for.

So yes, a price war is needed; shopping at Tesco needs to be a rational decision for shoppers. This will cost a fortune and permanently depress margins, not just at Tesco but across the industry, but it is desperately needed. It will help consumers by delivering a permanent, one-off reduction to prices which will go down well in today’s difficult times. But price cuts won’t be enough: shopping at Tesco will also need to be more of an emotional decision, in the same way that it is today for many Waitrose, Marks & Spencer and Sainsbury’s customers.

Many of Britain’s major retailers have a key competitive advantage that Amazon cannot yet match: they can deliver within one-hour slots to every home in the country from very early in the morning to very late at night, every single day of the year. They have an astonishing logistics business; in the years ahead, we may see them doing deals with other retailers or companies to leverage this. It is also quite clear that the big supermarkets’ foray into financial services has only just started. So it would be madness to write off the industry and even more stupid to dismiss Tesco’s chances. But Lewis will have to unleash an immediate cultural revolution if he is to turn the supertanker around.